Cap Rate Calculator
Cap rate from a proper net operating income, plus the cash-on-cash return and coverage ratio that decide a leveraged purchase.
Price $420,000.00
Gross income a year $32,400.00
less vacancy at 6% -$1,908.00
collected $30,492.00
less management at 9% -$2,744.28
less operating costs -$7,400.00
less capital reserve -$4,200.00
Net operating income $16,147.72
Cap rate 3.84%
which is net operating income over price, ignoring the mortgage entirely
gross yield 7.71%, which is what a listing usually quotes
the gap 3.87%, all of it costs
value at 1 point lower $567,643.23
value at 1 point higher $333,307.24
With the mortgage
borrowed $315,000.00 at 6.2% over 25 years
payment a month $2,068.23
payment a year $24,818.80
cash flow a year -$8,671.08 ← negative
cash flow a month -$722.59
The numbers that decide it
cash invested $119,000.00, deposit plus costs
cash-on-cash return -7.29%
debt service coverage 0.65
what a lender wants 1.25 or better, so this would be declined or repriced
break-even occupancy 120.9%
Leverage cuts both ways
cap rate 3.84%
mortgage rate 6.2%
so leverage lowers the return: the debt costs more than the building earns
Rules of thumb, for what they are worth
the 1% rule rent of $4,200.00 a month, against $2,650.00
gross rent multiplier 13.0
price a unit of NOI 26.0
The cap rate is 3.84% and the gross yield is 7.71%. The difference is
the costs, and a listing that quotes the second as though it were the
first is describing a building nobody has to maintain, insure, manage or
ever have empty.
A cap rate ignores financing on purpose. That makes it the right tool
for comparing two buildings and the wrong one for judging your return:
cash-on-cash and the coverage ratio are what change when the loan
changes, and they are what a lender and a spreadsheet both look at.
Leverage helps only while the cap rate exceeds the borrowing rate. Here
the building earns 3.84% and the debt costs 6.2%, so borrowing lowers
the return. That comparison is the single most useful check before
signing.
A capital reserve is not optional. A roof, a boiler and a bathroom all
have finite lives, and a purchase modelled without setting aside for
them shows a profit until the year it does not. One to two percent of
the building value a year is a common reserve, and old buildings need
more.
Count management even when you manage it yourself. Eight to twelve
percent of collected rent is the market price of the work, and a model
that treats your evenings as free is comparing an investment against a
part-time job.
Cap rate and value move inversely, and that is a market-wide risk. Rates
rise, cap rates rise, and the same income is worth less: a point on the
cap rate here changes the value by a large fraction, which is printed
above.
The 1 percent rule and the gross rent multiplier are screening filters,
not analysis. They were coined in different markets and different
interest-rate environments, and a property that passes either can still
lose money every month.
This is arithmetic on your assumptions. Real returns depend on rent
growth, the exit price, tax treatment, depreciation and what breaks in
year three, and none of that is derivable from a purchase price.
Output is valid and updates as you type.
Fix the highlighted fields to update the output.
The listing says the yield is 7.71 percent. Once vacancy, management, running costs and a capital reserve come out, the cap rate is 3.84 percent. Both numbers are computed from the same rent.
A cap rate is net operating income divided by price, and it deliberately ignores financing. That makes it the right tool for comparing two buildings and the wrong one for judging your return: two buyers paying the same price have the same cap rate and completely different outcomes depending on the loan.
On the example below, the loan turns a 3.84 percent cap rate into a negative cash flow of $723 a month and a coverage ratio of 0.65, which a lender would decline. That is the arithmetic worth doing before the offer.
How to use
- Put in the price and the rent at full occupancy.
- Fill in every cost line, including a management fee and a capital reserve.
- Add the deposit, rate and term to see the cash-on-cash return and the coverage ratio.
Example
Gross income a year $32,400.00
less vacancy at 6% -$1,908.00
less management at 9% -$2,744.28
less operating costs -$7,400.00
less capital reserve -$4,200.00
Net operating income $16,147.72
Cap rate 3.84%
gross yield 7.71%, which is what a listing usually quotes
the gap 3.87%, all of it costs
value at 1 point lower $567,643.23
value at 1 point higher $333,307.24
With the mortgage
borrowed $315,000.00 at 6.2% over 25 years
payment a month $2,068.23
cash flow a year -$8,671.08 ← negative
The numbers that decide it
cash invested $119,000.00, deposit plus costs
cash-on-cash return -7.29%
debt service coverage 0.65
what a lender wants 1.25 or better, so this would be declined or repriced
break-even occupancy 120.9%
Leverage cuts both ways
cap rate 3.84%
mortgage rate 6.2%
so leverage lowers the return: the debt costs more than the building earnsBreak-even occupancy above 100 percent is the clearest possible statement: this property cannot cover its costs even when it is never empty.
Pitfalls
Leverage helps only while the cap rate exceeds the borrowing rate. That single comparison is the most useful check before signing, and it is the one a spreadsheet full of projections tends to bury.
A capital reserve is not optional. A roof, a boiler and a bathroom all have finite lives. A purchase modelled without setting aside for them shows a profit until the year it does not. One to two percent of the building value a year is common, and an old building needs more.
Count management even if you manage it yourself. Eight to twelve percent of collected rent is what the work costs. A model treating your evenings as free is comparing an investment against a part-time job.
Zero vacancy is a listing, not a plan. Five to eight percent is a normal assumption, and a single month’s void on an annual let is already eight percent.
Cap rates and values move inversely, and that is market risk. When rates rise, cap rates rise, and the same income is worth less. The value at one point either side is printed above, and the swing is large.
Never compare a cap rate against a mortgage rate to judge “profit”. They are different quantities: one is a return on the whole asset, the other a cost on the borrowed part. The comparison tells you the direction leverage works, not the profit.
The 1 percent rule is a filter from another market. It was coined in a different interest-rate environment, and a property that passes it can still lose money every month. Use it to discard, never to decide.
Compatibility
Arithmetic in the browser: nothing is uploaded and nothing is stored.
The net operating income is built top-down and shown line by line, which is the form that makes an optimistic assumption visible. Vacancy is applied to the rent only, not to other income, which is the convention.
The mortgage payment is the standard annuity formula, checked in the test suite against a known figure, and the coverage ratio is net operating income over annual debt service, which is what a commercial lender calculates. Break-even occupancy is the share of gross income needed to cover debt and running costs.
What this does not model: rent growth, the exit price, tax, depreciation, interest-only periods, and what breaks in year three. Every one of them changes the answer, and none is derivable from a purchase price.